Park Evaluation for Newbie


#1

Hi everyone, I am looking to purchase my first park and needed some assistance in evaluating this potential deal.

The park is in the southeast region in a city with a population of around 55,000.

It has 9 tenant owned homes and 22 park-owned homes (3 of which are currently vacant and need some rehab).

Lot rents are currently only $120 but they are well below market rates which are between $200 - $250. Park owned homes currently rent between $400 to $600 depending on the size (mix of 1, 2 and 3 bedroom mobile homes in the park).

The park has city utilities that are paid by the tenants.

Gross income is around $108,000 and expenses are around $15,000 which seems to be on the low end and does not include management fees since the owner manages the park. To be on the safe side, expenses should probably be closer to $25,000 or $30,000 which would result in an NOI of around $78,000 to $83,000.

For the purpose of the cap rate analysis, I think $200 a lot would be reasonable rather than the current rate of $120.

After some preliminary negotiation, I managed to get the price down to $500,000. Bank financing would be available with 20% down. Is this something that I should be pursuing further?


#2

$500k sounds way too high a price. And $15k of expenses must be way understated, especially with all the POHs. For lot rent only parks, the expectation is an expense ratio of 30%-40% of gross. With 22 POHs, the expense ratio would be a higher percentage.

There are 28 occupied lots at $120 lot rent, so the gross income on lot rent only is around $40k/year. Using a 30% expense ratio, the NOI would be around 28*$1200.712 = $28k. If you want a 10 cap, a reasonable price would be $280k. At an 8 cap, you would pay $350k. The lot rent would need to be around $200 already to command a price of around $500k.

Note that I’m also new to this and looking for a first park now.


#3

Thanks Nick.

My line of thinking was similar to yours but I used the $200 market rate for lot rents in my analysis.

I would be curious to know whether a cap rate analysis for parks can include the market rate for lot rents rather than actual lot rents. In this case, the deal essentially hinges on this issue because the park with $120 lot rents is worth a lot less than what it would be if the lot rents were at market rates.


#4

@Wesley - They can do whatever you’d like. For a park this small you should require a higher return. I usually don’t like to pay the owner for the work you have to do even if it is raising rents.

In this scenario, value it off what it is worth today and what you think you can reasonably get it to in the future. If you are satisfied with the return then give it a shot.

For parks less than 100 lots, you shrink your buyer pool unless the park is a development play or a bolt-on acquisition. Therefore, you should demand a better return on your money.

Just my 2 cents.